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Privatizing PEMEX a tricky undertaking

Mexicans protest against the privatization of PEMEX at the national Senate building in Mexico City in 2008. The banner translates to "The petroleum belongs to Mexico." The Associated Press)

Mexicans protest against the privatization of PEMEX at the national Senate building in Mexico City in 2008. The banner translates to “The petroleum belongs to Mexico.” (The Associated Press)

All eyes are on Mexico’s PRI party, having regained the presidency in the 2012 elections after losing the nation’s highest office in 2000.

The PRI had ruled Mexico with an iron fist for 71 years and had gained the reputation of being extremely cozy with the nation’s most powerful businessmen, enabling them to build formidable empires in industries such as telecommunications, milk, bread, tortillas/dough and cement. Mexico is no stranger to monopolies, many formed with the approval of the federal government.

Mexican President Enrique Peña Nieto, a PRI member, successfully has pushed through congress the privatization of Mexico’s petroleum industry, a goal that several of his successors failed to achieve or were too timid to attempt.

PEMEX was nationalized in 1938 and had become a virtually untouchable agency that also was a symbol of national pride in asserting Mexico’s right to control a key economic sector. Long after he is out of office, this achievement will be looked at as the crowning achievement of his administration.

As a government monopoly, PEMEX has become a bloated, inefficient, bureaucratic organization that is considered a golden economic goose, badly in need of reform and new investment to keep Mexico a net exporter of petroleum.

The privatization legislation that was passed allows Mexico’s congress, until the end of next year, to develop a protocol for how petroleum projects will be bid in the private sector and how revenues will be handled.

There is a general worry in Mexico, and to an extent the rest of the world, that the privatization of the country’s petroleum industry will develop much like the privatization of other key sectors.

A good example is Mexico’s telecommunication industry, which was privatized more than 20 years ago. When privatization took place, Mexican businessman Carlos Slim stepped in to take control of Telefonos Mexicanos (Telmex) as a privately owned monopoly. On the cellular-phone industry side, Slim created Telcel, the dominant cellphone provider in Mexico.

These companies function as virtual monopolies and have resulted in Mexicans paying high telephone and long-distance service rates. Slim’s control of Telmex has allowed him to expand his might in other industries, such as construction and retail. According to sources, Slim, who in the past several years has vied with Bill Gates as the richest person in the world, has a fortune roughly equivalent to 7 percent of Mexico’s economic output.

The $64,000 question is, by privatizing its petroleum industry, will Mexico trade one monopoly for another?

The stakes are high, as PEMEX recently has announced several key investments to upgrade its infrastructure. The U.S. Department of Commerce estimates that equipment/service sales to Mexico’s energy sector topped $11.35 billion in 2013. Growth in this market is 13.6 percent per year.

In 2014, PEMEX will invest more than $27 billion, the most ever announced, to boost its production and increase its exploration efforts. Within the next two years, PEMEX will invest $600 million to upgrade and modernize its ocean fleet. It also has announced that it will contract the services of 42 ocean vessels for drilling and exploration purposes.

PEMEX CEO Emilio Lozoya publicly has stated that the company will need to invest more than $60 billion per year to be able to modernize its infrastructure and maximize its output.

At the border, the buzz surrounds shale gas and petroleum reserves in the Ojinaga region, southeast of Juarez. These reserves are a southern extension of the Eagle Ford region in West Texas. Twenty entrepreneurs from the state of Chihuahua already have put their money together to conduct studies on these reserves and to establish that region’s first oil well.

With numbers so large, talk is turning to who the possible players in the fledgling privatized Mexican energy sector could be, particularly those with the wherewithal to play at these levels.

Mexican companies/tycoons that seem best positioned to take advantage of Mexico’s new energy reform include Slim, with his vast fortune, business and political acumen.

German Larrea of Grupo Mexico, one of the nation’s largest mining and infrastructure companies, is also mentioned as a potential player. Alonso Quintana, head of Empresas ICA, Mexico’s largest construction company, is another obvious player.

Armando Garza Sada of conglomerate Grupo Alfa, which is the world’s largest producer of aluminum blocks and engine heads, along with petrochemical products, has the financial might and expertise to succeed in the privatized petrochemical industry. The geothermal exploration and drilling services company Constructora y Perforadora Latina and the oil construction and maintenance company Grupo Ralso are strong players that are mentioned in the conversation.

The participation of several of these large players in Mexico’s petroleum industry probably would ease the concerns that one or two behemoths will dominate the field, resulting in inflated prices for Mexican consumers and the prevention of healthy competition.

Within the next two years, we should have a good idea of whether Mexico’s privatization of its petroleum industry occurs differently than has been the case in the past with other industries.

Jerry Pacheco is the executive director of the International Business Accelerator, a nonprofit trade counseling program of the New Mexico Small Business Development Centers Network. He can be reached at 575-589-2200 or jerry@nmiba.com.

 

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